Case of the Day: CTI Systems v. Herr Industrial
Posted on March 17, 2015
The case of the day is CTI Systems, SA v. Herr Industrial, Inc. (E.D. Pa. 2015). CTI, a Luxembourg company, contracted with Herr, a Pennsylvania corporation, for supplies and labor in connection with a “painting installation” in Kansas. The contract amount was $5.2 million, and the contract had Luxembourg choice of law and choice of forum clauses. According to the allegations in the complaint, Herr failed to complete the work required by the contract, and CTI overpaid Herr.
In 2014, CTI sued Herr in the District Court of Luxembourg, seeking to recover the alleged overpayment. Herr was served with process but did not appear. The Luxembourg court entered a default judgment for nearly $400,000. CTI then sued in the Eastern District of Pennsylvania, seeking recognition and enforcement of the judgment.
In between the date of the Luxembourg judgment and the date when CTI sued on the judgment, Herr sued CTI in the District of Kansas, alleging that it was still owed money under the contract. The suit alleged a violation of the Kansas Fairness in Private Construction Contracts Act (the KFPCCA), which requires all payment disputes concerning Kansas construction contracts to be brought in Kansas courts. Herr served process on CTI before CTI filed its suit for recognition and enforcement.
The issue before the Pennsylvania court was whether to dismiss CTI’s claim on the grounds that the Kansas suit was the first-filed suit.
If the first-filed rule applies, then absent extraordinary circumstances the Kansas action would have precedence over the Pennsylvania action. But CTI argued that the first-filed rule did not apply, because the two actions addressed “discrete subjects.”
The judge disagreed, because he concluded that before it could decide on the parties’ respective rights under the contract, it would have to decide on the enforceability of the choice of court agreement in the original contract. The court’s discussion is not as clear as it could be, but I think what the judge is saying is that because CTI would, no doubt, raise res judicata as a defense to the claim in Kansas (and probably make a counterclaim for recognition and enforcement of the Luxembourg judgment), the Kansas court would necessarily need to decide whether the Luxembourg court had jurisdiction over Herr.
This basically seems right to me. You might think this smacks of forum shopping, since Herr’s place of business was in Pennsylvania, but Kansas as a forum clearly held a reasonable relationship to the claim, and in fact at least one of the claims might have to be litigated in the Kansas courts for statutory reasons. Forum shopping like this happens all the time and is hardly an exceptional circumstance that would suggest departing from the first-filed rule. CTI will be able to make whatever arguments in Kansas it could have made in Pennsylvania.